Case Discussion Questions

Case 1: Marriott Corporation: The Cost of Capital

1) What is the WACCC for:
a) Marriott Company as a whole?
b) Lodging division?
c) Restaurant division?
d) Contract services division?
2) Is it appropriate to use a single corporate hurdle rate for evaluating investment
opportunities in each of its lines of business?

Case 2: Hill Country Snack Foods Co.

1) How much business risk does Hill Country (HCSF) face? How much financial risk would
the company face at each of the three alternative debt-to-capital ratios presented in
case Exhibit 4? How much value could HCSF create for its shareholders at each of the
three alternative debt levels?
2) What debt-to-capital structure would you recommend as optimal for HCSF? What are
the advantages of adding debt to the capital structure? How would issuing debt impact
the company's taxes and expected costs of financial distress? How would the financial
markets react if the company increased its financial leverage?
3) How could HCSF implement a more aggressive capital structure? What methods could
be used to increase debt and decrease equity?
4) Considering HCSF's corporate culture, what arguments could you use to persuade CEO,
Keener or his successor to adopt and implement your recommendation?

Case 3: New Heritage Doll Company

1) Set forth and compare the business cases for each of the two projections under
consideration by Emily Harris. Which do you regard as more compelling?
2) Use the operating projections for each project to compute NPV for each. Which project
creates more value?
3) Compute the IRR and Payback period for each project. How should these metrics affect
Harris' deliberations How do they compare to NPV as tools for evaluating projects?
When and how would you use each?
4) What additional information does Harris need to complete her analysis and compare the
two projects? What specific questions should she ask each of the project sponsors?
5) If Harris is forced to recommend one project over the other, which should she
recommend? Why?
Case 4: Dell’s Working Capital
1) How was Dell’s working capital policy a competitive advantage?
2) How did Dell fund its 52% growth in 1996?
3) Assuming Dell sales will grow 50% in 1997, how might the company fund this growth
internally? How much would working capital need to be reduced and / or profit margin
increased? What steps do you recommend the company take?
4) How would your answer to the above question change if Dell also repurchased $500
million of common stock in 1997 and repaid the long-term debt?
Case 5: Deutsche Brauerie
1) What accounts for Deutsche Brauerie’s rapid growth in recent years? Specifically, what
policy choices account for this success?
2) What is DB’s credit policy toward its distributors in Ukraine? Why is it different from the
policy toward its other distributors? Is the company’s credit policy appropriate? If not,
how would you change it? If so, what arguments would you offer to the Board of
Directors in its defense?
3) Why does this profitable firm need increasing amounts of bank debt?
4) As a member of the BOD, how would you vote on:
a) The proposed raise for Oleg Pinchuk?
b) The quarterly dividend declaration of $698,000?
c) Adoption of the financial plan for 2001?

Case 6: Dividend Policy at Linear Technology

1) Describe Linear Technologies payout policy.
2) What are Linear's financing needs? Should Linear return cash to its shareholders?
3) What are the tax consequences of keeping cash inside the firm?
4) If Linear were to pay out its entire cash balance as a special dividend, what would be
the effect on value? On the share price? On earnings? On EPS? What if Linear
repurchased shares instead? Assume a 3% rate of interest?
5) Why do firms pay dividends? Why has the rate of dividend initiations changed over
time?
6) 5) What should Paul Coghlan recommend to the Board?